Leading shares lost ground today but still turned in their best ever quarterly performance.

Growing optimism about economic recovery as well as the return of corporate activity - such as Kraft's bid for Cadbury - have lifted the FTSE 100 by 21% since the start of July. This compares with a 14.9% quarterly rise in 1999 at the height of the dotcom boom, and a gain of 14.3% ahead of the October 1987 crash. Joshua Raymond, market strategist at City Index, said:

It's been a terrific quarterly performance and this has bred confidence that the markets have turned a significant corner. The gains have been led by stronger company earnings and an economic picture that continues to show signs that the worst may now be over. As a result, investor appetite for risk has been high with strong demand for the heavyweight financials and miners.

However, after an early rise, the leading index ended the quarter on a downbeat note, falling 25.82 points to 5133.90. The turning point was an opening decline on Wall Street, as news of a fall in business activity in the US mid-west outweighed better than expected GDP figures.

Man led the risers as the world's largest listed hedge fund issued an upbeat trading statement. Its shares climbed 23.1p to 331.2p after it said an increase in private clients investing in its products helped to make up for institutions withdrawing their cash. Net outflows fell to $500m in the third quarter from $1.4bn in the previous three months. There was even a revival of bid speculation. Later the company said it planned to buy back shares for cancellation.

However a number of other trading updates provoked mixed reactions. Marks & Spencer fell 12.7p to 362.1p and Thomas Cook lost 8.5p to 232.3p but Smiths Group climbed 50.5p to 888.5p.

Insurers were still wanted as takeover speculation refused to die down, even though Italy's Generali denied it was interested in Legal and General, up 5.05p to 87.8p. A positive note from Deutsche Bank also helped the life sector, with Prudential up 3p to 601.5p, and Aviva adding 16.9p to 448.1p. The bank said:

A combination of near and longer term macro factors, operational improvements, and improving clarity of disclosure is likely to generate more positive newsflow for life companies than non-life in the coming months, and our recommendations remain broadly skewed in that direction. Looking at the life names, we remain of the view that Prudential (buy) is the best franchise in the sector with strong management and materially under-estimated earnings per share potential. However, we recognize that the buy case is essentially long term, and that the share performance has been very strong recently. From a timing perspective, we thus put more emphasis on other life names. Axa remains the best European play on a recovering market looking into 2010, with scope for dividend surprise. Aviva (buy), Old Mutual (buy) and Swiss Life could potentially benefit from restructuring, and are cheaply valued. We continue to see L&G as relatively less attractive, but with Solvency II less of a threat amidst narrowing spreads, we upgrade from sell to hold.

Elsewhere Lloyds Banking Group dropped 1.1p to 103.7p after Cazenove said it could lose up to £1.1bn of its annual earnings from European Union state aid sanctions. Caz analyst Simon Pilkington said in a note:

The range of potential [sanctions] remains wide but speculation focuses on the reduction in market share of personal current accounts and SME banking, the two traditional areas of interest to competition authorities. On the basis of the speculation we estimate the potential cost to Lloyds from European Commission sanctions lies between £0.5bn and £1.1bn of annual earnings.

But software group Sage rose 4.9p to 233.4p as Morgan Stanley upgraded from equalweight to overweight and raised its price target from 217p to 270p.

Lower down the market Care UK climbed 80p to 377.5p as it rejected a bid approach from private equity group Bridgepoint Capital. The health and social care provider said the offer was unsolicited, and very preliminary in nature. Brewin Dolphin analysts said rival bidders may now emerge. They said:

Corporate developments this morning have clearly put Care UK in the spotlight. We view Bridgepoint as a highly credible suitor, with the main risks of a failed bid being valuation aspirations and funding limitations. Having said this, we feel other suitors may enter the fray given Care UK has a number of fundamental attractions strategically given the mid-term outlook for the UK healthcare market. We estimate a takeout valuation between 450p-500p and move to a buy [from hold] given the potential upside.

But electric car and access platform group Tanfield slid 8p to 49.75p after it reported a half year operating loss of £11m. Tanfield also said it was considering splitting itself into two separate companies.